October Dates to Remember

Around this time of the year, I get a surge of individuals wanting me to prepare the previous year’s taxes. Then I remember…October 1 is the first day to file the FAFSA for college financial aid. Some colleges award scholarships and financial assistance on a first-come, first-served basis.

October Dates to Remember

October 15 is the new deadline to file your return if an extension was filed earlier this year.  If you filed for an extension on your taxes, October 15 is also the last day to contribute to a SEP IRA for self-employed people and small business owners.

Sometime in the fall, usually beginning in October or November, most employers hold their open enrollment period so you can change your employee benefits for the upcoming year. Review your health election, 401(k), and other employee benefits like life and disability insurance to see if they’re still meeting your needs. Do you have a flexible spending account (FSA)? Use those funds for qualified medical expenses or child care expenses by the end of the year. That money generally won’t roll over into next year. If you have a health savings account (HSA), that money will roll over and is tax-deferred, so consider maxing it.

November 1 is just around the corner and is the opening day of the federal health insurance marketplace enrollment for 2021 coverage. Iowa State University Extension has online class scheduled to help individuals choose wisely, the kind of health insurance they need.  The Smart Choice Basics class is intended for individuals that are 65 or younger and helps you select the right plan. Smart Choice Actions teaches individuals how to make wise use of the health insurance plan and intended for adults of any age.  Both workshops are 1 hour long at begin at 6:00 PM.  For dates and registration information, go to…

10/26/20  Smart Basics

11/2/20  Smart Use

12/1/20  Smart Basic   

12/8/20  Smart Use

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Unemployment and Taxes

Did you know unemployment benefits count as taxable income? If you (or someone you know) have received unemployment income during this year when so many people have experienced job loss, here is the bigger question: Did you have taxes withheld from the payments?

If you are currently receiving unemployment income, now is a good time to check and see if federal and state income taxes are being withheld; if they are not, you should be able to change that going forward. Why does it matter? Next winter when you file your 2020 tax return, you will find out how much tax you owe on your 2020 income. If you didn’t have enough withheld from your paychecks, then you may need to pay in by April 15. It’s possible that the amount you need to pay in could be $1,000, $2,000 or even more. In addition, you may owe penalty for not having enough withheld, and/or a penalty for late payment if you cannot pay the bill in full by April 15.

What can you do now? If you received unemployment income and did NOT have taxes withheld, I would encourage you to go to the IRS Tax Withholding Estimator, and enter information about all your income for the year, along with the information it asks for about family size and other tax-related issues. Don’t worry; this is anonymous – it’s just a calculator for your own benefit. Based on the results of your calculations, you should have a pretty good idea of what to expect. If it looks like you will owe taxes, you can start saving now, or even send in one or two quarterly estimated payments using IRS form 1040 ES. Checking in with your tax preparer might also be a good idea.

The IRS recently issued a poster alerting people to take action and avoid the unpleasant surprise of a big tax bill. If you can, please consider posting it on social media or posting printed copies at your place of work, or house of worship, or at local businesses, to help others plan ahead.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Officially ending a marriage simplifies taxes

Every year during tax season I come across people who are still legally married even though they haven’t had contact with their spouse for years. They cannot file a tax return as “Single.” If they aren’t divorced or legally separated, that leaves them stuck with a “Married Filing Separately” (MFS) tax status.

There are several disadvantages to using the MFS filing status, including:

  • You are not eligible for Earned Income Credit.
  • You can not deduct student loan interest paid.
  • You do not qualify for Education Credits (American Opportunity or Lifetime Learning Credit) related to college expenses.
  • You must know and list your spouse’s name and social security number on your tax form; if you cannot, then your tax return will need to sent in by mail instead of submitting electronically.
  • If one spouse itemizes deductions, the other spouse must also itemize deductions.
  • On the Iowa return, you must report approximately how much income your spouse has; if you cannot, then your Iowa return will need to be sent in by mail.

There is an exception – one group of people who are split from their spouse but do not have to file MFS. These are people who are paying the cost to keep up a home for someone else (typically a parent who is keeping up a home for his/her children).  These individuals can be “considered unmarried” if they have not lived with their spouse at any time during the last six months of the year; if so they qualify for “Head of Household” filing status, which allows them to receive the Earned Income Credit and other tax benefits. However, when the children are grown and the taxpayer can no longer claim “Head of Household,” then they must use Married Filing Separately as their tax status.

“What’s the point of all this?” you may be asking.  I have two reasons for covering this topic today, as this long COVID-extended tax season finally approaches its end.

  • First, I’m tired of breaking bad news to people – the news that their tax return may be difficult to file and they can’t get some of the tax credits they might want.  
  • Second, to put forth the suggestion indicated in the title: If the marriage is over, maybe it would be smart to make that official. If you have reasons to avoid divorce, consider a legal separation if possible. Taking that step would make tax filing easier for both parties.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Nursing Home Residents: Keep your economic impact payment

If finances are tight, the federal economic impact payment being issued through the CARES Act for coronavirus relief may have a big impact on your well-being. Unfortunately, residents of care facilities in many states (including Iowa) are being told incorrectly that they must relinquish their payment.

This problem occurs when an individual is receiving Medicaid benefits to help cover the cost of their care. Nursing home administrators, acting on misinformation, believe they must recover the extra income to defray Medicaid costs. However, the CARES Act specifically labels the payments as “tax credits,” and tax credits are exempt from income and resource limits placed on those who are benefiting from certain government assistance programs.

Nearly every United States household should receive an economic impact payment, including households that receive Social Security, Supplemental Security Income (SSI), or Veterans Administration benefits. The payments should be deposited automatically to the same account where you receive either your tax refund or your SSA, SSI, or VA income. The IRS, which is responsible for issuing the payments, offers a lookup resource to help people track their payment. Note: the look-up link for those who do not file a tax return is separate from the link for tax filers; be sure to use the correct link.

If you have loved ones living in care facilities, especially if they are receiving Medicaid benefits to help cover the cost of care, be on the watch for any attempts to get them to turn over their economic impact payment to the facility. If this has already occurred, it should be refunded; contact the Iowa Attorney General’s office for help if needed. Note: it is important to keep in mind that nursing home administrators who try to claim the payment are not trying to steal; they are trying to do the right thing, but are simply misinformed about what the law requires.

Source: Federal Trade Commission

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Financial Cause and Effect

As a site coordinator and quality reviewer at a local Volunteer Tax Assistance site, I am able to see hundreds of real-life examples of “cause and effect”. 

  • What EFFECT will cashing out my 401k have on my taxable income? It may CAUSE a portion of your Social Security taxable.
  • What EFFECT will $24,000 of income (with no withholdings) have on a 19 year-old full-time student living at home? The EFFECT will be felt by the student who will owe taxes and by the parents who will not be able to claim the child as a dependent.

The most recent unpleasant EFFECT was CAUSED by gambling winnings.  A very lucky woman in her 70’s received a W-G from a local casino, indicating she won $20,800 worth of winnings with NO taxes withheld. The fact that no taxes were withheld did not bother her because she also had documentation showing her losses, which far exceeded her winnings. She knew that her losses could be deducted from her winnings. What she did not understand was…

  • She could only write-off the losses that were equal to her winnings…meaning…of the 25,000 of losses she had incurred trying to win the $20,800, she could only write off 20,800.
  • What she also did not know was…The losses are reported on a schedule A, while the winnings are counted as income. Once the winnings were added to her pension income and the $26,418 of social security income, she discovered that, not only had the winnings pushed her into a higher tax bracket, her income now was high enough that $13,661 of her Social Security was now taxable. Last year, with no gambling winnings, none of her Social Security was taxed.
  • It was only after her total income was calculated that she could subtract her itemized deductions (which included her gambling losses). 

The combination of increased income (due to gambling winnings), plus the increased tax bracket, plus the increase in the taxable portion of her social security, and the fact that there were no tax withholding on the gambling winnings; this woman owed more than $2000 for her federal tax return…something she had not anticipated.

Before doing anything different with your money, it is important to stop and consider what effect it will have on your tax return.

Brenda Schmitt

Brenda Schmitt

A Iowa State University Extension and Outreach Family Finance Field Specialist helping North Central Iowans make the most of their money.

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Income Taxes in Retirement

United States tax forms

As a volunteer tax preparer with VITA (Volunteer Income Tax Assistance), I frequently wish people understood taxes better. In recent weeks I’ve done three tax returns for people who, in their first year of retirement, cashed out their entire IRA or 401(k) account (ranging from $15,000 to $60,000).

In most cases, these new retirees used the funds for their long-term benefit – major home improvements and other purchases that will help them in the long run. I think they probably thought about the fact that spending the money now means they’ll live on more limited income for the rest of their lives, and they decided that was okay with them.

But I do NOT think they understood the tax implications of their decision, and I found myself wishing I would’ve had the chance to explain it all before they decided to withdraw the whole amount at once. Here are some things retirees should know:

  1. Withdrawals from “traditional” IRA, 401(k), and similar retirement plans will generally be included in your taxable income. Large withdrawals can easily move you into a higher tax bracket, meaning that you pay a higher tax rate on some of that income. For a single person, income above about $53,000 is typically subject to a 22% tax rate, rather than the lower 10% or 12% rate.
  2. The first year of retirement is especially tricky for income tax purposes, because usually the person also had employment income for part of the year, which may contribute to bumping them into a higher tax bracket.
  3. Social Security income is only partly taxable (at most 85% of it is subject to tax). How much is taxable depends on how much other income you have that year. When a person has very low income, none of their Social Security income will be taxable; as their income increases, the portion of Social Security subject to tax also increases. That means that large withdrawals from retirement accounts can create a double-whammy by increasing the taxable amount of Social Security as well has increasing total income.

I know that some of the clients I served paid at least $5,000 more in income tax than they would have if they had spread their retirement plan withdrawals over five years, or even over two or three years. I’m also pretty confident that they did not really understand the tax impact when they made the decision to withdraw it all at once.

Bottom line? Before making decisions about withdrawing from retirement plans, consider various options and get information from someone who is knowledgeable about taxes. If you don’t have a tax expert to ask, try using IRS form 1040-ES (estimated taxes) OR the IRS online withholding estimator to compare different options. Note: remember to consider state income taxes, as well.

Barb Wollan

Barb Wollan

Barb Wollan's goal as a Family Finance program specialist with Iowa State University Extension and Outreach is to help people use their money according to THEIR priorities. She provides information and tools, and then encourages folks to focus on what they control: their own decisions about what to do with the money they have.

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Secure Act: Part 1

The Secure Act was originally written to make changes to retirement laws. The act passed through the House last May and was held by the Senate until November when it was added to the Appropriations Bill and signed into law in December.

The law change catching attention is the starting age for required minimum distributions (RMDs). If you are retired and reached 70 1/2 before the end of 2019 you are required to take distributions. Everyone else can wait until the year they reach age 72. The annual RMD amount continues to be based on life expectancy tables published by the IRS.

The other change attracting attention relates to distribution rules for inherited retirement accounts. These accounts, including IRAs, 401(k)s and other similar qualified accounts, generally have named beneficiaries. When there is just one beneficiary and it is the spouse, then the withdrawal rules are the same as if the account originally belonged to the spouse. The SECURE Act did not change this.

However, when the account beneficiary is not the spouse, the rules for taking distributions have changed. In general, the beneficiary must take distributions on a schedule that will liquidate the account within ten years. Stretch IRAs, which set up for distributions over the beneficiary’s life expectancy, are no longer an option. Beneficiaries will want to plan for the tax implications of those distributions.

Exceptions to the ten year distribution schedule include: disabled beneficiary, chronically ill beneficiary, beneficiaries not more than ten years younger than the deceased, and children that have not reached the age of majority. Separate rules apply to these individuals, and also to situations where multiple beneficiaries are named, so professional guidance is recommended.

More about the Secure Act will follow in subsequent posts……

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Secure Act : Part II

Welcome to part two of our review of the the Secure Act! We’ll introduce you to some of the other retirement plan changes employees can expect to hear about as new rules and options are added to their plans.

A part-time employee who has worked a minimum of 500 hours each year for three continuous years can now begin making retirement savings contributions to an employer’s retirement plan. This change expands eligibility beyond the old rules that allowed an employer to use a 1,000-hours-worked rule before full time employees are allowed to participate in a retirement plan.

New tax credits are available for small business owners who start a retirement plan for their employees. Additional credit is given if the plan uses an automatic enrollment structure. The additional business tax credit is also available if an existing plan is converted to automatic enrollment. The business tax credits range from $500 to $5000 and can be claimed for three years. Small employers can also participate in multiple-employer plans that allow many unrelated businesses to join together to share costs of plan administration.

Old rules allowed employers to include annuity options in their 401K plans, but if the insurance company selling the annuity contract failed, the employer was required to guarantee the continuation of the contract payments. The Secure Act removed the employer’s responsibility to protect retirees. The inclusion of annuities in retirement plan menus is expected to increase.

The cap for auto enrollment contributions to an employer’s retirement plan was 10% of employee pay; the amount has been raised to 15%. Employers must continue to give employees the option, once a year, to change their contribution.

The Secure Act also removes the restriction that prohibited individuals age 70 1/2 or older, who are still working, from making contributions to an IRA.

In our next post we will visit some of the non-retirement changes included in the new Secure Act.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Secure Act: Part III

Eligibility for participation in retirement savings plans, incentives for small businesses to establish retirement plans, and rules for contributions and distributions are the main focus of the Secure Act, but there are other changes worth understanding in the new law.

  • Loans allowed by an employer from retirement funds can no longer be distributed through a credit card account or similar arrangements. If received through a credit card, the funds must be claimed as income and are subject to taxes and penalties.
  • Withdrawals from retirement accounts can now be made for the birth or adoption of a child within one year of the event. The limit is $5000 per account owner and it has to be claimed as income, but there will be no penalty tax added.
  • At least once a year, your retirement account report must include a statement of monthly benefits the owner can expect in retirement. The amount will be based on a single lifetime or joint lifetime annuity.
  • 403B and 457 plans have new rules for transferring account funds to a new employer’s plan or to a qualified plan distribution annuity.

And in areas unrelated to retirement accounts:

  • 529 plans can now be used to cover the costs of registered apprenticeships, homeschooling costs, private elementary, secondary and religious schooling. Up to $10,000 can be used to repay student loan debt. (State alignment is necessary so check your state rules.)
  • The Kiddie Tax on unearned income is being reset to rules in place before the 2017 TCJA law. Under TCJA, unearned income was subject to the Estate or Trust tax rates. Amended returns can be filed for 2018.
  • The penalty for failing to file a tax return is a maximum of $400 or 100% of the tax due.

Rules and implementation guidelines will further define these changes, so check with financial professionals and your employer’s HR departments for more details.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Capital Gains Taxes

United States tax documents with cash and the American flag

My husband is retired, so he has more opportunities to spend time in the repair shop waiting for tires to be patched or equipment to be repaired, all the while chatting with his peers. Those conversations result in questions for me when there has been a discussion about finances. The topics of inquiry are usually related to estate planning. The average age of farmers is 57.5 years, so it stands to reason it wouldn’t be about student loans, and he doesn’t need answers when the topic is commodities, livestock or equipment sales.

The most recent ask was the result of a statement concerning a tax liability of 38% if farm ground was sold. “That’s probably wrong” I said, and here is why:

  • Only property owned for less than a year is subject to regular income tax rates.
  • The 2019 tax rates on regular income is 10%, 12%, 22%, 24%, 32%, 35%, and 37%
  • The owner would be able to subtract costs and would only pay taxes on the profit. Farm ground has actually gone down in price or stayed stable during the past year.
  • Income taxes are graduated and rise as your income increases. All single taxpayers pay 10% on the first $9,700 of taxable income. The 37% income tax is calculated on income greater than $510,301.

If the farm ground was owned for more than a year then profits from sales would be subject to long term capital gains taxes.

  • Long term capital gains taxes are 0%, 15%, and 20%.
  • The tax rate would be determined by income. A single taxpayer with income of $39,375 or less pays 0%, 20% is the capital gains rate when a single taxpayer has income greater than $434,551.

If the farm ground had a house on it and the owner lived in it for two of the five years before the sale, then up to $250,000 of profit resulting from the home sale would be exempt from taxes.

There could be an extra tax as a result of the Affordable Care Act. A 3.8% investment tax is collected when a single taxpayer’s investment income exceeds $200,000.

With plenty of tax laws to consider and individual circumstances that vary, it wouldn’t be wise to suggest taxes on the sale of farm ground would be 38%.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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